o Excluding partnerships and other corporations

But partnerships and other corporations can be stockholders in

another corporation as long as they are not incorporators thereof
(El Hogar case)

Chapter III Formation/Organization

Who may form a corporation?

2.
Section 5. Corporators and incorporators, stockholders and members. - Corporators
are those who compose a corporation, whether as stockholders or as members.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.

At least 5 incorporators must sign the AOI

If only 2 incorporators are residents of the RP, a corporation still
existsa de facto corporation, provided
o At least 5 incorporators must sign the AOI
One-man corporations: owner can still incorporate by giving
nominal ownership of one share of stock each to four other
persons (legal)
Incorporator will always retain his status as incorporator of the
corporation
Reason for 5 incorporator requirement: if anything goes wrong if
the incorporation process, and liabilities created at the time of
incorporation, then the existence of 5 allows the public or injured
party to run after the persons

Corporators in a stock corporation are called stockholders or shareholders.

Corporators in a non-stock corporation are called members. (4a)

Incorporators: SHs or members mentioned in the AOI as originally forming and

composing the corporation and who are signatories thereof
Corporators: all SHs or members, whether incorporators or those joining the
corporation after incorporation
Every incorporator must be a stockholder

3.

Residence requirement; citizenship requirement only in certain areas

No general requirement of RP citizenship
Some areas of industry and business are limited/reserved for
Filipino citizens
o Public utilities
o Retail trade
o Banks
o Investment houses
o Savings and loan associations
o Schools
o Other areas Congress may by law provide

Section 10. Number and qualifications of incorporators. - Any number of natural

persons not less than five (5) but not more than fifteen (15), all of legal age and a
majority of whom are residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of s stock corporation
must own or be a subscriber to at least one (1) share of the capital stock of the
corporation. (6a)

1.

At least five (5) incorporators, but not more than 15

Must be natural persons

Only natural persons can be incorporators

 Where more than 40% of outstanding capital is to be owned or

controlled by aliens: written authorization must first be sought with
the BOI before registration with the SEC
4.

labor intensity of the activity, the export potential, as well as other factors which are
germane to the realization and promotion of business and industry.

Restrictions on stock ownership of closely-knit groups

Sensitive areas where ownership by a close-knit group may be

detrimental to the public interest
o Ex. Banksno bank may be licensed to operate if
equity of one person or persons related to each other
within the 3rd degree of consanguinity/affinity exceed
20% of bank voting stock

Stock ownership in close corporations may be limited

by the AOI ifo members of the same family or group

Section 97. Articles of incorporation. - The articles of incorporation of a close

corporation may provide:

Section 140. Stock ownership in certain corporations. - Pursuant to the duties

specified by Article XIV of the Constitution, the National Economic and Development
Authority shall, from time to time, make a determination of whether the corporate
vehicle has been used by any corporation or by business or industry to frustrate the
provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including
recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals related to
each other by consanguinity or affinity or by close business interests, or whenever it
is necessary to achieve national objectives, prevent illegal monopolies or
combinations in restraint or trade, or to implement national economic policies
declared in laws, rules and regulations designed to promote the general welfare and
foster economic development.

1.

For a classification of shares or rights and the qualifications for owning or

holding the same and restrictions on their transfers as may be stated
therein, subject to the provisions of the following section;

xXx

Steps in Formation of Corporation

1.

Promotional stage
Promoter, Defn: one who brings together persons who become
interested in enterprise, aids in procuring subscriptions and sets
in motion the machinery which leads to the formulation of the
corporation
Securities Regulation Code: promoter is a person who, acting
alone or with others, takes initiative in founding and organizing
the business of the issuer and receives consideration therefor
o He formulates the necessary initial business and
financial plans

In recommending to the Batasang Pambansa corporations, businesses or industries

to be declared vested with a public interest and in formulating proposals for
limitations on stock ownership, the National Economic and Development Authority
shall consider the type and nature of the industry, the size of the enterprise, the
economies of scale, the geographic location, the extent of Filipino ownership, the

If necessary, buys the rights and property which the

business may need; with the understanding that once
formed, he shall take over the same
o Promoters may also be incorporators
o Revised securities act sec 2
Code: before incorporation,
o at least 25% authorized capital stock should be
subscribed
o at least 25% of subscribed stock is paid-in
if initial capital requirements cannot be met, then promoters have
to promote the business so other persons could invest
shares of stock cannot be sold publicly unless they are first
registered with the SEC
SEC requires disclosure of all pertinent information regarding:
o purposes,
o character and nature of business,
o financial position,
o financial responsibility of directors and officers,
o nature of shares to be issued
Must appear in a registration statement
o Filed with the SEC
o Published in 2 newspapers of gen. circulation
o Once a week for 2 consecutive weeks
If all requirements are complete, SEC issues an order making
registration effective
SEC grants corporation a permit to offer securities for sale

SHs and State

Corporation and SHs
AOI does not become binding unless they have been filed with the
registered by the SEC

2.

Section 14. Contents of the articles of incorporation. - All corporations organized

under this code shall file with the Securities and Exchange Commission articles of
incorporation in any of the official languages duly signed and acknowledged by all of
the incorporators, containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located,
which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;

Articles of Incorporation; drafting

6. The number of directors or trustees, which shall not be less than five (5)
nor more than fifteen (15);

AOI: constitute the charter of the corporation. It is the contract between the
corporation and its SHs as well as the agreement among SHs
Basic contract document in Corporate Law
o Defines the charter of the corporation
o Defines contractual relationships between and among:
State and corporation

7. The names, nationalities and residences of persons who shall act as

directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in

lawful money of the Philippines, the number of shares into which it is

divided, and in case the share are par value shares, the par value of each,
the names, nationalities and residences of the original subscribers, and the
amount subscribed and paid by each on his subscription, and if some or all
of the shares are without par value, such fact must be stated;

KNOW ALL MEN BY THESE PRESENTS:

9. If it be a non-stock corporation, the amount of its capital, the names,

nationalities and residences of the contributors and the amount contributed
by each; and

AND WE HEREBY CERTIFY:

The undersigned incorporators, all of legal age and a majority of whom are
residents of the Philippines, have this day voluntarily agreed to form a (stock) (nonstock) corporation under the laws of the Republic of the Philippines;

FIRST: That the name of said corporation shall be "_____________________, INC.

or CORPORATION";

10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.

SECOND: That the purpose or purposes for which such corporation is incorporated
are: (If there is more than one purpose, indicate primary and secondary purposes);

The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn statement of
the Treasurer elected by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has been subscribed, and
at least twenty-five (25%) of the total subscription has been fully paid to him in
actual cash and/or in property the fair valuation of which is equal to at least twentyfive (25%) percent of the said subscription, such paid-up capital being not less than
five thousand (P5,000.00) pesos.

THIRD: That the principal office of the corporation is located in the City/Municipality
of ________________________, Province of _______________________,
Philippines;
FOURTH: That the term for which said corporation is to exist is _____________
years from and after the date of issuance of the certificate of incorporation;
FIFTH: That the names, nationalities and residences of the incorporators of the
corporation are as follows:

Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by

special law, articles of incorporation of all domestic corporations shall comply
substantially with the following form:

NAME NATIONALITY RESIDENCE

ARTICLES OF INCORPORATION OF

___________________ ___________________ ___________________

__________________________

___________________ ___________________ ___________________

(Name of Corporation)

___________________ ___________________ ___________________

___________________ ___________________ ___________________

___________________ ___________________ ___________________

above stated has been subscribed as follows:

SIXTH: That the number of directors or trustees of the corporation shall be

_______; and the names, nationalities and residences of the first directors or
trustees of the corporation are as follows:

Name of Subscriber Nationality No of Shares Amount

NAME NATIONALITY RESIDENCE

_________________ __________ ____________ ____________

___________________ ___________________ ___________________

_________________ __________ ____________ ____________

___________________ ___________________ ___________________

_________________ __________ ____________ ____________

___________________ ___________________ ___________________

_________________ __________ ____________ ____________

___________________ ___________________ ___________________

_________________ __________ ____________ ____________

___________________ ___________________ ___________________

NINTH: That the above-named subscribers have paid at least twenty-five (25%)
percent of the total subscription as follows:

Subscribed Subscribed

SEVENTH: That the authorized capital stock of the corporation is

______________________ (P___________) PESOS in lawful money of the
Philippines, divided into __________ shares with the par value of
____________________ (P_____________) Pesos per share.

Name of Subscriber Amount Subscribed Total Paid-In

_________________ ___________________ _______________

(In case all the share are without par value):

_________________ ___________________ _______________

That the capital stock of the corporation is ______________ shares without par
value. (In case some shares have par value and some are without par value): That
the capital stock of said corporation consists of _____________ shares of which
______________ shares are of the par value of _________________
(P____________) PESOS each, and of which _________________ shares are
without par value.

_________________ ___________________ _______________

_________________ ___________________ _______________
_________________ ___________________ _______________
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is nonstock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is

EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock

sufficient if the articles state the amount of capital or money contributed or donated
by specified persons, stating the names, nationalities and residences of the
contributors or donors and the respective amount given by each.)

SIGNED IN THE PRESENCE OF:

TENTH: That _____________________ has been elected by the subscribers as

Treasurer of the Corporation to act as such until his successor is duly elected and
qualified in accordance with the by-laws, and that as such Treasurer, he has been
authorized to receive for and in the name and for the benefit of the corporation, all
subscription (or fees) or contributions or donations paid or given by the subscribers
or members.

(Notarial Acknowledgment)

_______________________ _______________________

TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.

ELEVENTH: (Corporations which will engage in any business or activity reserved

for Filipino citizens shall provide the following):

PROVINCE OF )

"No transfer of stock or interest which shall reduce the ownership of Filipino citizens
to less than the required percentage of the capital stock as provided by existing laws
shall be allowed or permitted to be recorded in the proper books of the corporation
and this restriction shall be indicated in all stock certificates issued by the
corporation."

I, ____________________, being duly sworn, depose and say:

That I have been elected by the subscribers of the corporation as Treasurer thereof,
to act as such until my successor has been duly elected and qualified in accordance
with the by-laws of the corporation, and that as such Treasurer, I hereby certify
under oath that at least 25% of the authorized capital stock of the corporation has
been subscribed and at least 25% of the total subscription has been paid, and
received by me, in cash or property, in the amount of not less than P5,000.00, in
accordance with the Corporation Code.

IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation,

this __________ day of ________________, 19 ______ in the City/Municipality of
____________________, Province of ________________________, Republic of
the Philippines.

____________________

_______________________ _______________________

(Signature of Treasurer)

_______________________ _______________________

SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the
City/Municipality of ___________________ Province of _____________________,
this _______ day of ___________, 19 _____; by __________________ with Res.
Cert. No. ___________ issued at _______________________ on ____________,
19 ______

________________________________
(Names and signatures of the incorporators)

 Once approved SEC issues an amended

incorporation under the corporations new name
Change of name does not result in dissolution

NOTARY PUBLIC
My commission expires on

certificate

of

Philips Export BV v CA (206 S 457). Philips of the Netherlands files an action

with the SEC to delete the name Philips from the corporate name of Standard
Philips Company. Standard refuses, and Philips sought an injunction to enjoin
Standards from the use if the name Philips. SEC Hearing Officer dismisses Philips
petition, arguing that Sec 18 of Corpo Code is only applicable when the corporate
names are identical. SEC en banc affirms HOs decision; corporate names contain
at least two different words and rules out confusion. CA dismisses Philips petition,
saying that Standards products are unrelated and do not compete with Philips
products and would not mislead consumers. I: W/N Standards use of the word
Philips in its corporate name is unlawful and may be removed under the Corpo
Code. H: Yes. The corporations right to use its corporate name is a property right,
a right in rem which it may assert and protect against the world. A name is
secularly important as necessary to the very existence of a corporation. Its name is
one of its attributes, an element of its existence, and essential to its identity. GR:
each corp must have a name by which it is to sue and be sued and do all legal
acts. A corp acquires its name by choice and need not select a name identical with
or similar to one already appropriated. To come under the application of Sec 18 of
the Corpo Code, 2 requisites must be proven: (1) corp has a prior right over the
use of the name, or; (2) proposed name is either identical or
deceptively/confusingly similar, or; (3) it is patently deceptive, confusing or contrary
to existing law. The right to exclusive use of corporate name is determined by
priority of adoption. Philips was incorporated on 1956 and Standard only 2 years
later. In determining the existence of confusing similarity in corporate names, the
test is w/n the similarity is such as to mislead a person using ordinary care and
discrimination. A reading of the names of Philips and its subsidiary companies
indicate that Philips is indeed a dominant word in that all companies affiliated with
the principal corp are known in the RP. Given also Standards primary purpose,
nothing could prevent it from dealing in the same line of business of electrical
devices, products, or supplies which fall under its primary purposes. Standards
use also tends to show its intention to ride on the popularity and established
goodwill of Philips. Furthermore, because Philips is a trademark or trade name

_________, 19 _____
Doc. No. _________;
Page No. _________;
Book No. ________;
Series of 19____ (7a)
Contents of AOI (Sec 14)
(1) Corporate name
Name is essential to corporate existence
It is through the name that the corporation can sue and be sued
and perform all legal acts
Code does not allow the corporation to adopt a name identical or
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or
which is patently deceptive, confusing, or contrary to existing laws
If name is legally permissible the SEC allow the parties to reserve
it for a reasonable period
Code requires a corporation to append the word Corporation or
Inc. to its chosen name
A corporation should transact business only in its corporate name
Can amend the name provided it is done in accordance with the
procedure laid down by the Code for amendments of AOI and
approval by SEC of the change in corporate name

registered as far back as 1922, they have the exclusive right to use the name free
from infringement by similarity.

the corporate name does not make a new corporation, whether effected by a
special act or under a general law. It has no effect on the identity of the
corporation, or on its property, rights, or liabilities. The corporation, upon such
change in its name, is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a different name, and its
character is in no respect changed.

Lyceum of the Phils. v CA (219 S 610). Lyceum of the Philippines Inc sues all
academic institutions it could find having the corporate name Lyceum. SEC rules
against Lyceum and upheld by the CA. I: W/n use of word Lyceum in its corporate
name has been for such length of time and with such exclusivity as to have been
associated with Lyceum of RP.

(2) Purpose clause

Confers as well as limits the powers which a corporation may exercise
Sec 45: corporate powers:
o Expressly granted by law and the AOI
o Incidental to conferred powers
o Reasonably necessary to accomplish its purposes and incidental
to its existence
Must specify primary and secondary purposes
o Secondary purpose need not be related to the main purpose
Three reasons for requiring a purpose clause in the AOI
o So that a prospective SH contemplating an investment shall know
within what lines of business his money is to be risked
o So that management may know within what lines of business it is
authorized to act
o So that anyone who deals with the corporation may ascertain w/n
a contract or transaction is within the general authority of
management
Sec 14(2): a corporation can have as many purposes as it may wish
to include in its AOI, subject to the ff conditions:
a) The AOI must specify which is the primary purpose and which are
the secondary purposes (need not be related)
b) For corporations governed by special laws or covered by special
provisions in the Code: can have only ONE purpose peculiar to
them and no other (ex educational corporations cannot engage in
export and import)
c) Purpose(s) must be lawful

H: Lyceum is not entitled to a legally enforceable exclusive right to use the word
Lyceum in its corporate name.
(1) corporate names of the other Lyceums not identical with, or deceptively or
confusingly similar to Lyceum of the RP. Confusion and deception are precluded by
the appending of the geographic name after Lyceum.
(2) Lyceum the word is as generic in character as the word university. But Lyceum
of RPs use of the word Lyceum in its corporate name has not been attended with
the exclusivity essential for applicability of the doctrine of secondary meaning. In
fact Western Lyceum used the word 17 years before Lyceum of RP.
(3) even if Western Lyceum is deemed to have lost its rights under the original
registration which was never restored when destroyed by fire, the point was merely
to emphasize that the word has already been used previously and is not exclusive
to Lyceum of RP.
PC Javier and Sons v CA.
H: From the foregoing documents, it cannot be denied that petitioner corporation
was aware of First Summa Savings and Mortgage Bank's change of corporate
name to PAIC Savings and Mortgage Bank, Inc. Knowing fully well of such change,
petitioner corporation has no valid reason not to pay because the IGLF loans were
applied with and obtained from First Summa Savings and Mortgage Bank. First
Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc.,
are one and the same bank to which petitioner corporation is indebted. A change in

NEDA has the power to refuse or deny the application for

registration of any corporation if not consistent with the
declared national economic policies
A corporation cannot be formed for the purpose of
practicing a profession
Non-stock corporations:

(4) Term of existence

Not to exceed 50 years from date of incorporation
o extendible for a period not exceeding 50 years by amendment to
AOI
o no extension made earlier than 5 years before original or
subsequent expiry date
exception: justifiable reasons

Section 88. Purposes. - Non-stock corporations may be formed or organized for

charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special provisions of this Title
governing particular classes of non-stock corporations. (n)

Section 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless said
period is extended. The corporate term as originally stated in the articles of
incorporation may be extended for periods not exceeding fifty (50) years in any
single instance by an amendment of the articles of incorporation, in accordance with
this Code; Provided, That no extension can be made earlier than five (5) years prior
to the original or subsequent expiry date(s) unless there are justifiable reasons for
an earlier extension as may be determined by the Securities and Exchange
Commission. (6)

Investment in activities not within its primary purpose

o Sec 42: allowed provided
Approved by majority of Board
Ratified by 2/3 of outstanding capital stock
o Exception: where reasonably necessary to accomplish
primary purposes, SHs approval not necessary
Interpretation of purpose clauses
o GR: construed as including incidental powers reasonably
necessary to the proper exercise of the powers enumerated
in the AOI
o Detailed specification of powers enumerated, by implication,
excludes all other powers or rights
Except incidental or subordinate powers and rights
necessary to an exercise of powers expressly given

(5) Names, nationalities, and residencies of the Incorporators

and directors;
Names, nationalities, and residencies of the incorporators, and
directors or trustees who will act as such until the first regular
directors/trustees are elected
o AOI must also name the treasurer chosen by the preincorporation subscribers

(3) Place of Principal office of the corporation

(6) Number of directors or trustees; qualifications

Residence of the corporation

Must be within the Philippines
Specify city or town where located

Number of directors: not less than 5, not more than 15

o For non-stock: can exceed 15 trustees
o Merger of banks: total number of directors of the merged banks
(may exceed 15)

o Educational non-stock: multiples of 5

Code is SILENT on amendment of AOI to increase number of
directors to more than 15
Incorporators must own at least one share of capital stock
Directors must own at least one share of stock of a corporation of
which he is a director
In non-stock corps, a trustee must be a member thereof
Aliens may be directors, but only in such number proportional to their
allowable participation in the capital of an entity

the names, nationalities, and residencies of the original

subscribers,
the amount subscribed, and
how much is paid thereon
Sec 13: at least 25% of authorized capital stock, at least 25% of
total subscription to be paid upon subscription
for non-stock: minimum authorized capital stock not required, but
subject to Sec 13

o
o

Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription must
be paid upon subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in
no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n)

(7) Names, nationalities and residencies of persons acting as

directors/trustees until the 1st regular directors/trustees are
duly elected and qualified

(8) Amount of authorized capital stock, number of sharespar

value or no-par value, original subscribers and the amounts
subscribed and paid by each; subscription; payment

Paid-up capital at time of incorporation must be in cash deposited in a

bank or property
Pre-incorporation subscription: amount which each incorporator or
SH agrees to contribute to a proposed corporation
o Embodied in an agreement which takes and pays for the original
unissued shares of a corporation formed or to be formed
(Delpher)

Sec 12: corporations shall not be required to have any minimum

authorized capital stock except where provided by special law
In normal practice, SEC will not allow incorporation for P5000
minimum paid-up capital
Maximum capitalization is needed to protect SHs
Capital stock, defn: the amount fixed in the articles of incorporation
to be subscribed and paid in or secured to be paid in by the
shareholders, at the organization of the corporation or afterwards
Outstanding Capital Stock: total shares of stock issued to
subscribers or SHs, whether or not fully or partially paid except
treasury shares
Subscribed Capital Stock: portion of capital stock subscribed (i.e.
procured to be paid) whether or not fully paid
Subscription, defn: mutual agreement of the subscribers to take and
pay for the stock of a corporation
o AOI must show:

Section 60. Subscription contract. - Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that the parties
refer to it as a purchase or some other contract. (n)
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6)
months from the date of subscription, unless all of the other subscribers consent to

10

the revocation, or unless the incorporation of said corporation fails to materialize

within said period or within a longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities and Exchange
Commission. (n

and
6. Outstanding shares exchanged for stocks in the event of reclassification
or conversion.
Where the consideration is other than actual cash, or consists of intangible property
such as patents of copyrights, the valuation thereof shall initially be determined by
the incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.

Par value share: appears in the stock certificate specifiying the

amount in pesos as the nominal value of the shares appearing in the
certificate of stock
o Must be stated in the AOI
o Cannot be issued at less than stipulated par value
o Can only be changed by amendment in the AOI
Sec 62: Consideration for no par value shares issued is the issued
value, to be fixed in the ff ways:
o AOI
o By the BOD when authorized by the AOI or BLs
o SHs representing at least a majority of outstanding capital stock

Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation
or by the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding capital stock at a meeting duly
called for the purpose. (5 and 16)

Section 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;

Issuance of no par value must be reflected in the AOI

o Consideration cannot be less than issued valuecannot be less
than 5 pesos

2. Property, tangible or intangible, actually received by the corporation and

necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;

(9) Treasurers Affidavit

3. Labor performed for or services actually rendered to the corporation;

SEC shall not accept AOI unless accompanied by a sworn statement

by the Treasurer that:
o at least 25% of TOTAL authorized capital stock has been
subscribed

4. Previously incurred indebtedness of the corporation;

5. Amounts transferred from unrestricted retained earnings to stated capital;

11

at least 25% of subscribed and authorized capital stock has been

fully paid-up

(4) Any bonded indebtedness to be incurred, created or increased;

Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital stock
or incur, create or increase any bonded indebtedness unless approved by a majority
vote of the board of directors and, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which the proposed increase or
diminution of the capital stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.

(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing
of any bonded indebtedness shall require prior approval of the Securities and
Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation
and the other shall be filed with the Securities and Exchange Commission and
attached to the original articles of incorporation. From and after approval by the
Securities and Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or decreased and the
incurring, creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock
unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been paid
either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of
the subscription: Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of corporate
creditors.

A certificate in duplicate must be signed by a majority of the directors of the

corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number
of shares of no-par stock thereof actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend
therefor authorized;

Non-stock corporations may incur or create bonded indebtedness, or increase the

same, with the approval by a majority vote of the board of trustees and of at least

12

two-thirds (2/3) of the members in a meeting duly called for the purpose.

(20); (2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close corporation within the
meaning of this Code.

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)
Treasurer must make sworn statement that minimum requirements of
subscription and payment have been complied with
o If false, AOI disapproved or certificate of registration revoked

Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public interest in
accordance with the provisions of this Code.

(10) Other matters

AOI may include other matters not inconsistent with law, such as:
o classes of shares into which shares of stock have been divided
o Preferences of and restrictions on any class
o Denial of voting rights on certain shares or pre-emptive right of
SHs
o Prohibition against transfer of stock which would reduce
ownership to less than required minimum for wholly or partially
nationalized businesses/industries

The provisions of this Title shall primarily govern close corporations: Provided, That
the provisions of other Titles of this Code shall apply suppletorily except insofar as
this Title otherwise provides.

Section 97. Articles of incorporation. - The articles of incorporation of a close

corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated
therein, subject to the provisions of the following section;

(11) Close corporations

A corporation will be governed by Title XII on Close Corporations only
if its articles provide for certain specific matters

2. For a classification of directors into one or more classes, each of whom

may be voted for and elected solely by a particular class of stock; and

TITLE XII - CLOSE CORPORATIONS

3. For a greater quorum or voting requirements in meetings of stockholders

or directors than those provided in this Code.

Section 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1) All the
corporation's issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding twenty

The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than

13

1)
by a board of directors. So long as this provision continues in effect:

2)

1. No meeting of stockholders need be called to elect directors;

3)

2. Unless the context clearly requires otherwise, the stockholders of the

corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and

4)

SEC may, after consultation with BOI and NEDA, reject or deny
registration if not consistent with the declared national economic
policies
SEC decision appealable to CA

3. The stockholders of the corporation shall be subject to all liabilities of

directors.
The articles of incorporation may likewise provide that all officers or employees or
that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.

5.

Filing of articles; payment of fees

Section 19. Commencement of corporate existence. - A private corporation formed

or organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law. (n)

AOI and treasurers affidavit filed with the SEC and corresponding
fees paid
Failure to file AOI will prevent due incorporation and will not give rise
to juridical personality and will not even be a de facto corporation
4.

Issuance of certificate of incorporation

It is only upon issuance of the certificate of incorporation that the
corporation acquires a juridical personality distinct and separate from
its members or SHs, with power to sue and be sued and to perform all
other legal acts
Corporation DEEMED incorporated from the date SEC issues the
certificate of incorporation

Code allows a close corporation to provide in its AOI special

provisions which would exclude it from the operation of some of the
requirements and prohibition imposed on corporations in general, and
in effect make it an incorporated partnership (Sec 97)
3.

AOI or any amendment thereto is not substantially in accordance

with the prescribed form
Purpose(s) are patently unconstitutional, illegal, immoral or
contrary to government rules/regulations
Treasurers Affidavit concerning the amount of capital stock paid
or subscribed is false
Required percentage of ownership to be owned by Filipino
citizens has not been complied with

Examination of articles; approval or rejection by SEC

Upon receipt the SEC shall examine the AOI to determine conformity
with law
If not, SEC must give the incorporators reasonable time within which
to correct or modify objectionable portions
Grounds for rejection by the SEC:

6.

Amendment of AOI
Sec 16: any provision may be amended by:

14

o
o
o
o

majority vote of the Board of Directors AND

WRITTEN ASSENT of SHs representing at least 2/3 of OCS or
2/3 members of non-stock entitled to vote
Without prejudice to appraisal right of dissenting SH
Unless otherwise provided in the Code or special law

distinct and separate from its members or SHs if all of the ff are
present:
(1) there must be an apparently valid statute
(2) there has been colorable compliance with the legal requirements
in GF
(3) there has been user of corporate powers i.e. transaction of
business in some way as if it were a corporation

AOI: Contractual implications

if all are met by the defectively formed corporation, it will be

considered a de facto corporation
the due incorporation of a de facto corp cannot be collaterally
attacked either by the State or by private individuals
such incorporation must be attacked by the State through a quo
warranto proceeding
where requirements for a de jure or de facto corporation are not
present, then the associates may be held liable as partners for
obligations of the alleged corporation
o unless estoppel can apply (Sec 21)

AOI is the contract between the three (3) parties:

o State and corporation
o Stockholders and State
o Corporation and stockholders
Defectively incorporated entities;
De jure corporation
Not every defect precludes a de jure corporation; as long as the
mandatory requirements for incorporation are substantially complied
with, a corporation de jure will be formed
A de jure corporations due incorporation cannot be successfully
attacked even in quo warranto proceedings

1.

User of corporate powers

A slight evidence of conducting business is deemed sufficient

It is not necessary that the dealings between the parties should be on a
corporate basis
Ex. Buying a lot and constructing and leasing a building will constitute
sufficient user of corporate powers

De facto corporations
Section 20. De facto corporations. - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to exercise
corporate powers, shall not be inquired into collaterally in any private suit to which
such corporation may be a party. Such inquiry may be made by the Solicitor
General in a quo warranto proceeding. (n)

2.

Law subsequently declared void

GR: there can be no de facto corporation under a statute
subsequently declared unconstitutional
Exception: where the corporation in GF did all that is required under
the statute to form a valid corporation

If there is no substantial compliance with the mandatory requirements

for incorporation, a corporation be deemed to exist as a person

15

 In Hall v Piccio, unless certificate of incorporation has been issued,

there can be no de facto corporation
While in the process of incorporation, there can be no substantial nor
colorable compliance, and thus no de facto corporation (Cagayan
Fishing v Sandiko)

Municipality of Malabang v Benito. Balindog, mayor of Malabang, files an action

to nullify EO 386 which created the municipality of Balabagan, of which the mayor
is Benito. They invoke SCs ruling in Pelaez v Audito General declaring as
unconstitutional RA2370 or the Barrio Charter Act and Sec 68 of the Administrative
Code for being a statutory denial of the Presidents authority to create a new barrio
and for being an undue delegation of legislative powers, respectively. Benito
counters that Pelaez does not apply to them because the municipality of
Balabagan is a de facto corporation, having been created under the color of statute
before it was declared unconstitutional, and as a de facto corporation, its existence
cannot be collaterally attacked. H: Balabagan is neither a de facto nor a de jure
corporation. The true basis for denying to a corporation de facto status is the
absence of any legislative act giving life to its creation. An unconstitutional act is
not a law; it confers no rights, it imposes no duties, it affords no protection, it
creates no office. EO 386 thus created no office, although acts done by the office
are not exactly a nullity. The EO is as inoperative legally as though it were never
passed, an operative fact which cannot justly be ignored.

Harrill v Davis. Davis, Mann, R. Davis, and Knight agreed to take specified shares
in a $10000 enterprise for the purpose of building a cotton gin and carrying on the
business of buying, ginning, and selling cotton and to organize a corporation for
this purpose. They did business with Harrill, buying material and procure labor and
build their cotton gin. They purchased lumber and other materials from Harrill after
the gin was completed and after they commence operations. As a result, they
incurred indebtedness of over $5000, $4700 of which were incurred before they
had filed their articles of incorporation. During all this time, the four treated
themselves as a corporation, and so did Harrill.
H: They did not become a corporation de jure just because they failed to file their
articles of incorporation. Nor did they become a corporation de facto before they
filed the articles to such an extent as to exempt them from individual liability
because they did not before that time secure any color of legal organization as a
corporation under an charter or enabling act; they were liable individually as
partners for that part of the claim falling prior to the filing of the articles.

But a corporation created under a statute declared void it is given life by other valid
acts or in the constitution itself. The color of authority requisite to the organization
of a de facto municipal corporation may be: (1) an unconstitutional law, upheld for
a time or not yet declared void, provided a warrant for its creation is found in some
other valid law or recognition of its existence by the general laws or the
constitution. (2) there can be no de facto municipal corporation unless either
directly or potentially such a de jure corporation is authorized by some legislative
fiat (3) there can be no color of authority in an unconstitutional statute alone, the
invalidity of which is apparent on its face (4) there can be no de facto corporation
created to take the place of an existing de jure corporation.
3.

Hall v Piccio. The Halls, Browns, Chapman and Abella signed and acknowledged
articles of incorporation of the Far Eastern Lumber and Commercial Co Inc.
Pending action on the articles, the Browns, Chapman, and Abella sued the Halls in
the TC to dissolve what they call an unregistered partnership because of bitter
dissension, mismanagement, and fraud. Hall questions the jurisdiction of the TC
over their dispute. Judge Piccio then ordered the dissolution of the partnership and
appointed a receiver. The Halls filed a counterbond to discharge the receiver which
was denied by Piccio. I: W/N the TC had jurisdiction over the case, considering Far
Eastern Lumber was a de facto corporation which can only be dissolved in a quo
warranto proceeding in accordance with the Corpo Law. W/N the Browns, upon
signing the articles of inc, are estopped from claiming that it is not a corporation. H:
(1) the rule on de facto corps are not applicable to the case. Not having obtained
the certificate of incorporation, Far Eastern Lumber and even it stockholders

Substantial or colorable compliance

Difficult to ascertain when compliance with the legal requirements is
substantial or only colorable or less than colorable

16

cannot claim in GF to be a corporation. It is the issuance of the certificate of

incorporation that calls a corporation into being. The immunity of collateral attack is
granted to corps claiming in GF to be a corporation. Furthermore, the corporation
is not a party to the suit, it being a litigation bet stockholders of the alleged
corporation for the purpose of obtaining its dissolution. Even the existence of a de
jure corp may be terminated in a private suit between the stockholders without
need for interference by the State. The petitioners also have their remedy by
appealing the order of dissolution at the proper time. (2) Far Eastern not being a de
facto corp, the principle of corporation by estoppel doesnt also apply. The
complaining partners have not represented themselves that they were
incorporated, and nobody was led to believe anything to his prejudice and damage.

When business associates fraudulently misrepresent the existence of

a corporation, and a 3rd party contracts without knowledge of the
defective incorporation, the 3rd person may sue the associates as
general partners
o If the business associates and the 3rd person in the above
example had no knowledge of the defective incorporation, then
the 3rd person cannot hold the associates liable as partners (i.e.
personally liable)
Estoppel also applies even in a case where the alleged corporation
did not deal with the plaintiff suing on a tort
Difference bet de facto and estoppel:
o where all requisites of a de facto corporation are present, it will
have the status of de jure
o But if any of the requisites is absent, then estoppel may be
applied only if any of the parties is estopped from defending

Corporation by Estoppel
In corporation by estoppel, a party is precluded or estopped from
denying corporate existence
May apply to a third party or the alleged corporation

On who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation. (n)

ABC v Standard Products. Asia Bank is the creditor of Standard Products Co. It
seeks to recover the balance due on a promissory note issued by the latter iao
P24736.47. TC ruled IFO Asia Bank. Standard appeals, contending that ABC failed
to prove affirmatively the corporate existence of Standard.
H: GRin the absence of fraud, a person who contracted with an association in
such a way as to recognize and admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading out of such
contract or dealing, unless its existence is attacked for causes arising since making
the contract or other dealings. Standard already recognized the corporate
existence of Asia Bank by making a promissory note in its favor and making partial
payments, and is thus estopped from denying its corporate existence.

When a 3rd person entered into a contract with an association which

represented itself a corporation, the association will be estopped from
denying its corporate personality if sued by the 3rd party
When a 3rd person who dealt with an unincorporated association as a
corporation may be precluded from denying its corporate existence if
sued by the alleged corporation, even if he did not know about the
defective incorporation

Cranson v Intl Business Machines. Cranson invested in a new business corp to

be created. He purchased and received stock certificates. The business was
conducted as if it were a corporation through corporate bank accounts, corporate
books etc. Cranson was also elected President of the corporation and all
transactions made by him was for the account and as officer of the corporation.
However, the articles of incorporation which had been acknowledged and signed
prior to May 1 1964 were only filed on Nov 24 1961. During that time, the Bureau

Section 21. Corporation by estoppel. - All persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of corporate personality.

17

purchased 8 typewriters from IBM, and partials payments had already been made.
On the theory that the Real Estate Service Bureau was neither a de jure nor a de
facto corporation and that Albion Cranson was a partner in the business and thus
personally liable for the debts, IBM sued Cranson for the balance due on electric
typewriters purchased by the Bureau. I: W/N an officer of a defectively incorporated
corporation may be subjected to personal liability under the circumstances of the
case. H: No. The doctrine of de facto corporations applies only on (1) existence of
a law authorizing incorporation (2) effort in GF to incorporate (3) actual user or
exercise of corporate powers. The doctrine of estoppel to deny corporate existence
is generally employed where the person seeking to hold the officer personally liable
has contracted or otherwise dealt with the association in such a manner as to
recognize and in effect admit its existence as a corporate body. It has been
generally held that where there had been a failure to comply with a requirement
which the law declared to be a condition precedent to the existence of a
corporation, the corporation was not a legal entity and was therefore precluded
from suing or being sued as such. Substantial compliance with the formalities of
corporation law, which are condition precedent to corporate existence, was not only
necessary for the creation of a corporation de jure, but was also a prerequisite to
the existence of a de facto corporation or a corporation by estoppel. The doctrine
of estoppel cannot be successfully invoked unless the corporation has at least a de
facto existence, and a de facto corporation cannot be recognized in violation of a
positive law. There is a broad distinction between those acts made necessary by
statute as a prerequisite to the exercise of corporate powers and those acts
required of individuals seeking incorporation. On the other hand, where the
corporation has obtained legal existence but has failed to comply with a condition
subsequent to corporate existence, the Court has held that such nonperformance
afforded the State the right to institute proceedings for the forfeiture of the charter,
but that such neglect or omission could never be set up by the corporation itself, or
by its members and stockholders, as a defense to an action to enforce their
liabilities. It is clear that when a defect in the incorporation process resulted from a
failure to comply with a condition subsequent, the doctrine of estoppel may be
applied for the benefit of a creditor to estop the corporation, or the members or
stockholders thereof, from denying its corporate existence. Where the parties had
assumed corporate existence and dealt with each other on that basis, the Court
will apply the estoppel doctrine on the theory that the parties by recognizing the

organization as a corporation were thereafter prevented from raising a question as

to its corporate existence. Where there is a concurrence of the three elements
necessary for the application of the de facto corporation doctrine there exists an
entity which is a corporation de jure against all persons but the State. On the other
hand, the estoppel theory is applied only to the facts of each particular case and
may be invoked even where there is no corporation de facto. Thus in the case, IBM
dealt with the Bureau as if it were a corporation and relied on its credit rather than
that of Cranson, it is thus estopped from asserting that the Bureau was not
incorporated at the time the typewriters were purchased. Cranson is therefore not
personally liable for the balance of the purchase price of the typewriters.
Salvatierra v Garlitos, et. al. Salvatierra entered into a lease contract with the
Phil. Fibers Producers Co. Inc, allegedly a corporation duly organized and
registered under the laws of RP, with Refuerzo as its president. Among the
obligations in the contract were: period of lease is 10 years; land would be planted
with kenaf, ramie, or other crops; the lessor would be entitled to 30% of net income
and lessee should declare at the earliest possible time the income derived
therefrom. PFP failed to fulfill the obligations and Salvatierra sued the corp and
Refuerzo in the RTC for an accounting, rescission and damages. TC granted her
petition, but Refuerzo countered that decision was void with respect to him, there
being no allegation as to his personal liability and that while he was a signatory to
the contract, he did so in his capacity as president. TC granted his motion and
released all properties levied by its earlier judgment. Salvatierra appealed, claiming
that her failure to allege his personal liability was because all this time she was
under the impression that the PFP represented by Refuerzo was a duly registered
corporation, but a subsequent inquiry with the SEC revealed otherwise. H: GRa
person who contracted or dealt with an association in such a way as to recognize
its existence as a corporate body is estopped from denying the same in an action
arising out of such dealing but this doctrine may not be held to be applicable
where fraud takes a part in the transaction. A stockholder cannot be held liable for
any financial obligation by the corporation in excess of his unpaid subscription. But
this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association. This
is because such unincorporated association is incompetent to act and appropriate
for itself the powers and attributes of a corporation and cannot create agents or

18

confer authority. Thus those who act or purport to act as its representatives or
agents do so without authority and at their own risk. Considering that Refuerzo was
the moving spirit behind the consummation of the lease agreement by acting as
the representative of PFP, his liability cannot be limited or restricted to that imposed
upon corporate shareholders. In acting in behalf of a corporation he knew to be
unregistered, he assumed the risk of reaping the consequential damages or
resultant rights if any arising out of the transaction.

Labason should be awarded moral damages. H: No. Moral damages are granted in
recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation. A
corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no sense; therefore, it cannot
experience physical suffering and mental aguish. Mental suffering can only be
experienced by one having a nervous system and it flows from real ills, sorrows,
and all griefs of lifeall of which cannot be suffered by the corporation.

Chaing Kai Shek School v CA (172 S 389). Elementary schoolteacher Fausto

Oh, a teaching in the Chiang Kai Shek School in Sorsogon for 33 years, was
summarily dismissed from the school. In her suit against the school she demanded
separation pay, SSS benefits, and damages. She impleaded the other officials of
the school. TC dismissed the complaint but was reversed by the CA which held the
school liable, but not the school officials. I: W/N a school that has not been
incorporated may be sued by reason alone of its long continued existence. H:
School may be sued. The school is governed by Act 2706 as amended by CA 180.
Having recognized by the government, it was under obligation to incorporate under
the Corporation Law within 90 days from recognition. Although in existence since
1932, it had never made any attempt to incorporate, and thus cannot invoke its
own noncompliance with the law to immunize it from Ohs complaint. Having
contracted with Oh for 32 years while representing itself as possessed of juridical
personality, the school is now estopped from denying such personality.

Lozano v delos Santos (274 S452). Case involves a dispute between two leaders
of jeepney associations. Lozano is president of Kapatirang Mabalacat-Angeles
JDA or KAMAJDA while Anda is president of the Samahang Angeles-Mabalacat
JODA or SAMAJODA. The two organizations merged to form the Unified AngelesMabalacat JODA or UMJODA. Lozano and Anda ran for president of the new
organization and Lozano won. Anda protested, alleging fraud and refused to
recognize the results of the election. Anda also continued collecting dues from the
members of the SAMAJODA despite several demands to desist. Lozano sues
Anda in the TC, but Anda claims TC has no jurisdiction, only the SEC. MCTC rules
ifo of Lozano, but was reversed upon appeal by the RTC, which held the dispute to
be intracorporate. I: W/N the SEC or the TC has jurisdiction over the dispute. H:
Not intracorporate; SEC has no jurisdiction. The jurisdiction of the SEC is
determined by two elements: (1) status or relationship of the parties, which must
arise out of intracorporate or partnership relations between the parties (2) nature of
the question which is the subject of the controversy, which requires that the dispute
be intrinsically connected with the regulation of the corporation/association or deal
with the internal affairs of the corporation. There is no intracorporate dispute
between the parties in this case, because it arose out of their plan to consolidate
their associations, which is still a proposal and has not yet been approved by the
SEC nor has the articles been submitted. Consolidation only becomes effective not
upon mere agreement of the members but only upon issuance of the certificate of
consolidation by the SEC. Thus the KAMAJDA and the SAMAJODA are two
separate entities, and the dispute of the parties in the case is not within any of the
associations mentioned. It is between members of separate and distinct
associations. The doctrine of incorporation by estoppel advance by Anda is also
not applicable, which is founded on principles of equity and is designed to prevent

LBC Express, Inc. v CA (236 S 602). Carloto, President of Rural Bank of

Labason, was instructed to fly to Manila to meet with BSP officials on the payment
plan for rediscounting of its obligations. He requested his sister to send P1000 as
pocket money for the trip and include some rediscounting papers through the
petitioner LBCs Dipolog Office. The documents however, arrived at Carlotos
residence but without the cash. Despite follow-up, the cash was only received after
a month and after his scheduled trip to Manila. LBC claims Carloto was not at
home upon delivery and as a result the money was returned to LBC Dipolog.
Carloto claims that because of the delay in sending the money he failed to submit
the required papers and his bank was made to pay a P32000 fine. He then sued
LBC for damages, in his personal capacity, with the Rural Bank as one of the
plaintiffs. TC ruled ifo Carloto and the Rural Bank. I: W/N the Rural Bank of

19

injustice and unfairness. It applies when persons assume to form corporations and
exercise corporate functions and enter into business relations with third persons.
Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation and who have knowledge that it is not
incorporated, there is no corporation by estoppel.

without valid existence, are held to be liable as general partners. Although it is also
true that Lim did not directly act in behalf of the corporation, since he reaped the
benefits of the contract entered into by Chua and Yao with whom he had an
existing relationship, he is covered by the doctrine of corporation by estoppel.
Intl Express Travel v CA (343 S 674). Kahn is the president of the Phil Football
Federation. He contracted with the International Express Travel for the travel
arrangements for the football team to compete in the SEA Games in KL, including
matches in China and Australia. Amount due to the travel agent reached
P449654.83, of which P176467.50 were paid. Kahn also paid P50000 from his
personal funds. The remaining balance being unsatisfied, the travel agent sued
Kahn both in his personal and official capacity as well as the Federation in the
RTC. Kahn claims he merely acted as agent for the Federation, and that the
Federation being a corporation, he should not be liable. CA overrules TC and
exonerates Kahn, while recognizing the corporate existence of the Federation. I: Is
the Federation a corporation? If not, is it at least a corporation by estoppel? H: No.
Although the Federation derives its existence from RA 3135 or the Charter of the
Phil Amatuer Athletic Assoc and PD 604 which recognized the juridical existence of
national sports associations, such corporate status does not automatically take
effect by the mere passage of the laws. This is because before the corporation
may acquire juridical personality, the State must give its consent either in a special
law or a general enabling act. The laws cited merely recognized the existence of
the associations and provided the manner by which they acquire juridical
personality. Such entity must first be recognized by the accrediting organization
(PAAF and the Dept of Youth and Sports Devt. The bylaws presented by Kahn
does not prove that the Federation has indeed been recognized and accredited.
Thus, Kahn, falling under a person acting or purporting to act in behalf of the
corporation which has no valid existence assumes such privileges and obligations
and becomes personally liable for contracts entered into as its agent. It also does
not fall under a corporation by estoppel, which was mistakenly applied by Kahn. It
applies only to a third party when he tries to escape liability on a contract from
which he had benefited on the irrelevant ground of defective incorporation.

Lim Tong Lim v Phil. Fishing Gear Industries, Inc (317 S 728). In behalf of
Ocean Quest Fishing Corporation, Chua and Yao entered into a contract for the
purchase of fishing nets from Phil Fishing Gear Industries Inc. Lim Tong Lim was
their joint venture partner but was not a signatory to the agreement. Chua and Yao
failed to pay for the nets; and PFGI sued them and included Lim Tong Lim in their
capacities as general partners, on the allegation that Ocean Quest was a
nonexistent corporation upon inquiry with the SEC, and moved to attach their
properties. Lim filed a counterclaim and crossclaim and moved for the lifting of the
writ. TC ruled ifo PFGI, holding that a partnership existed between the three. CA
affirmed the TC ruling and held that Lim is a partner of Chua and Yao and is liable
as such for the payment of the nets. Lim appeals, claiming he did directly
participate in the negotiations and was not even a signatory to the agreement, and
was merely a lessor and not a partner. I: Is Lim a partner? H: Yes. It is clear that
Chua Yao and Lim together set up the fishing business, buying boats and financed
by a loan from Lims brother. The compromise agreement reveals the intention to
divide the excess/loss from proceeds of the sale of the boats. The boats, financed
by borrowed money, fell under the common fund which indicates the existence of a
partnership relation between the three. I: Is Ocean Quest a corporation by
estoppel, exonerating Lim from liability? H: No. The doctrine of estoppel applies
only to the alleged corporation and to the third party. As to the alleged corporation,
if it represents itself to be a corporation, will be estopped from denying it corporate
capacity in a suit against it by a third person who relied in GF on such
representation. As to the third party who, having an association to be incorporated,
nonetheless treated it as a corporation and received benefits from it, may be
barred from denying its corporate existence in a suit brought against the alleged
corporation. Lim definitely benefited from the use of the nets inside the FB
Lourdes, which was found to be an asset of the partnership. Although it was never
legally formed for unknown reasons, under the law on corporation by estoppel,
those acting in behalf of a corporation and those benefited by it, knowing it to be

Loyola Grand Villas Homeowners south Assoc Inc (South Assoc) v CA (276 S
681). LGVHAI is the association of homeowners and residents of the Loyola Grand

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Villas, duly registered with the HIGC as the sole homeowners assoc in the LGV, but
did not file its corporate by-laws promptly. When it did attempt to file, 2 other assoc
were already in existencethe North Assoc and the South Assoceach with 5
registered homeowners who were also incorporators and officers thereof. HIGC
claims the LGVHAI has been automatically dissolved for its failure to file its
corporate by-laws and non-user of the corporate charter. LGVHAI files a complaint
with the HIGC, which the latter recognizes in its ruling and revokes the certificates
of registration of the North and South Assoc. South appeals to Appeals Board of
HIGC, and upon dismissal, appeals with CA. CA dismisses appeal, holding that
although the Corpo Code does not provide for automatic dissolution of the
corporation as a result of delay in filing of by-laws, the SEC has the power to
suspend or revoke certificates of registration, one of the grounds of which is failure
to file by-laws. But since there was no showing the LGVHAIs registration was
validly revoked, it continued to be the recognized assoc in LGV. I: W/N LGVHAIs
failure to file its by-laws within the period prescribed by the Corpo Code had the
effect of automatically dissolving the corporation? H: No. Sec 46 requiring filing of
bylaws reveals the legislative intent to attach a directory, not a mandatory, meaning
of the word must. By-laws may be necessary for the government of the
corporation but these are merely subordinate to the articles of incorporation as well
as to the Corpo Code and related statutes. In some cases, the by laws were
considered unnecessary to corporate existence or to the valid exercise of corporate
powers. The failure to exercise the power will be ascribed to mere non-action and
will no render void any acts of the corporation which are otherwise valid. There can
also be no automatic dissolution without notice and compliance with the
requirements of due process. The Court also stressed that substantial compliance
are mere conditions subsequent and not prerequisites for acquisition of corporate
responsibility.

By-laws are the product of the agreement of the SH or members and

establish the rules for the internal government of the corporation
By-laws are subordinate to the AOI, Corpo code and the related
statutes
If by-laws are inconsistent with any of these, it has no binding effect
Power to adopt and amend by-laws is an inherent power of every
corporation (Gokongwei case)
Unlike AOI, are meant to be an intramural document to govern the
relationship between and among members of a corporate family
Intended for the protection of the corporation and prescribes
regulations, not restrictions
GR: although the power to adopt by-laws is an inherent right, the bylaws cannot contravene the law (El Hogar case)
o Validity or reasonableness of the by-laws is a question of law
(Gokongwei case)
Provisions of AOI prevail over the by-laws
Board of Liquidators vs. Kalaw: it is possible for an express provision
of the by-law to be violated and the board may, in certain corporate
actions, bind the corporation despite it being contrary to the by-laws
o Whether through board action or authorization or through
ratificatory act of the SHs, so long as there is corporate approval
through the board, be it implied or express, it is valid to bind the
corporation
GR: 3rd persons are not bound by the by-aws
o Exception: where they have actual or constructive knowledge
Section 36. Corporate powers and capacity. - Every corporation incorporated under
this Code has the power and capacity:

Internal Organization of Corporation

1.

-- x X x --

By-laws

5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code

Contractual significance

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-- x X x --

Requisites of by-laws:

TITLE V - BY LAWS

(1) By-law provisions cannot contravene law

(2) By-law provisions cannot contravene the AOI
(3) By-laws must be reasonable and cannot discriminate

Section 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at least a majority
of the outstanding capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of
the corporation, subject to the inspection of the stockholders or members during
office hours. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the Securities
and Exchange Commission which shall be attached to the original articles of
incorporation.

Procedure for Adoption of by-laws (Sec. 46):

Within one (1) month after receipt of official notice of issuance of
certificate of incorporation
o Loyola Grand villas case: Sec 46 is merely directory, and thus
failure to file by-laws within the period does not imply the demise
of the corporation, but is a mere ground for the SEC to revoke
the certificate
It may also de adopted and filed prior to incorporation
o must be approved, signed by all incorporators and filed with

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted

and filed prior to incorporation; in such case, such by-laws shall be approved and
signed by all the incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and
Exchange Commission of a certification that the by-laws are not inconsistent with
this Code.

the SEC together with the articles

vote required to adopt: at least majority of outstanding capital stock or
members of non-stock corp
signed by SHs and kept in principal office
certified copy filed with SEC attached to AOI
becomes effective only upon issuance of the SEC certification

Code allows adoption and filing of by-laws even prior to incorporation,

but must be approved by ALL incorporators and submitted to the SEC
together with the AOI
By-laws may be submitted within one (1) month after receipt of notice
of issuance of the certificate of incorporation
o Failure to do so may result in suspension or revocation of
certificate
SEC may disapprove by-laws which are inconsistent with law

The Securities and Exchange Commission shall not accept for filing the by-laws or
any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational institution
or other special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such by-laws or
amendments are in accordance with law. (20a)

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 Sec 46 provides clearly that in ALL cases, the by-laws shall be

effective only upon issuance by the SEC of a certification that these
are not inconsistent with law
Once approved by the SEC, by-laws will bind the corporation, and all
SHs and members including those who voted against the adoption

8. The penalties for violation of the by-laws;

9. In the case of stock corporations, the manner of issuing stock certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)

Basic Contents of By-Laws:

Sec 47 enumerates matters which may be included in the by-laws

By-laws may provide for the time, place and manner of directors
meetings
By-laws may provide for time and manner of SH meetings (place of
SH meeting is fixed by law at the principal office of the corporation
Code requires the by-laws provide for at least three (3) officers:
o President
o Secretary
o Treasurer
o Additional officers

Section 47. Contents of by-laws. - Subject to the provisions of the Constitution, this
Code, other special laws, and the articles of incorporation, a private corporation may
provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special meetings
of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of the
stockholders or members;
3. The required quorum in meetings of stockholders or members and the manner of
voting therein;

Other matters that may be included in by-laws:

(a) designation of time when voting rights may be exercised
by SH of record (24)
(b) providing for additional officers (25)
(c) provisions for compensation of directors (30)
(d) creation of an executive committee (35)
(e) date of annual meeting or provisions for a special
meeting of SHs/members (50 & 53)
(f) quorum on meetings of SHs/members (52)
(g) providing for presiding officer at meetings of
directors/trustees and of SHs/members (54)
(h) procedure for issuance of stock certificates (63)
(i) providing for interest on unpaid subscriptions (66)
(j) entries to be made in stock and transfer book (74)

4. The form for proxies of stockholders and members and the manner of voting
them;
5. The qualifications, duties and compensation of directors or trustees, officers and
employees;
6. The time for holding the annual election of directors of trustees and the mode or
manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers other
than directors or trustees;

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(k) providing for meetings of members outside the principal

office (24)

stock, or at least a majority of the members of a non-stock corporation, at a regular

or special meeting duly called for the purpose, may amend or repeal any by-laws or
adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or
two-thirds (2/3) of the members in a non-stock corporation may delegate to the
board of directors or trustees the power to amend or repeal any by-laws or adopt
new by-laws: Provided, That any power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt new by-laws shall be considered
as revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or a majority of the members in non-stock corporations,
shall so vote at a regular or special meeting.

Other matters that may be included in either the AOI or the by-laws:
(a) cumulative voting in non-stock corporations
(b) higher quorum for valid board meeting
(c) limiting, broadening or denial of right to vote and voting
by proxy, for non-stock corporations
(d) transferability of membership in non-stock corps
(e) termination of membership in non-stock corps
(f) manner of election and term of office of trustees and
officers in non-stock corps
(g) manner of distribution of assets in non-stock corps upon
dissolution
(h) staggered board in educational institutions
Matters that must appear in BOTH AOI and BLs:
(a) restrictions on right to transfer shares
corporations (98)

Whenever any amendment or new by-laws are adopted, such amendment or new
by-laws shall be attached to the original by-laws in the office of the corporation, and
a copy thereof, duly certified under oath by the corporate secretary and a majority of
the directors or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of incorporation and
original by-laws.

in close

The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)

Matters that CANNOT be in the by-laws:

(a) classification of shares and preferences to preferred shares
(b) founders shares
(c) redeemable shares
(d) purposes of the corporation
(e) corporate term of existence
(f) capitalization of stock corporations
(g) corporate name
(h) denial of pre-emptive rights

who can amend by-laws:

o owners of at least a majority of outstanding capital stock or
members of non-stock corp
2/3 of outstanding capital stock or members may delegate to the
board the power to amend or repeal by-laws
o only then can the board amend by majority vote
In the Kalaw case, the SC held that contract entered into without strict
compliance with the by-laws may, due to long acquiescence and
usage, be binding on the corporation, which may be deemed to have
waived such compliance.
In the Fleischer, since by-laws operate merely as internal rules among
SHs, they cannot affect or prejudice 3rd persons who deal with the
corporation, unless they have knowledge of the same

Amendments to By-Laws
Section 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding capital

24

Therefore by-laws or other regulations restraining such transfers, unless derived

from statutory authority, would be regarded as impositions in restraint of trade.

Fleischer v Botica Nolasco. Fleischer was the owner and transferee, for valuable
consideration, of 5 shares of stock of the Botica Nolasco Corp, transferred to him
by the original owner. The Corporation however invokes Article 12 of its corporate
by-laws, which effectively gives the corporation a preferential right of the shares in
question. It claims it has a preferential right to buy the shares from the original
owner. When Fleischer requested Botica to register his shares, the latter refused,
and Fleischer sues in the TC. TC ruled ifo Fleischer, holding that the questioned
Art 12 is in direct conflict with Sec 13 of Act 1459. I: W/N Art 12 of the by-laws of
the corporation is in direct conflict with the Corporation Law? H: Yes. The Corpo
Law at the time provides in Sec 13 that every corporation has the power to make
their own by-laws, provided they are not inconsistent with any existing law,
governing among others the transfer of its stock. This section does not
contemplate any restriction on how and to whom the shares may be transferred or
sold, nor does it suggest any discrimination ifo or against a certain purchaser. The
holder of these shares, as owner of personal property, is at liberty to dispose of
them to anyone he pleases, without any limitation other than in the general law.
Every owner of corporate shares has the same uncontrollable right to alienate
them which attaches to the ownership of any other species of property.
Furthermore the SC says Sec 13 should be harmonized with Sec 35 of the same
law, which requires that shares of capital stock are personal property transferable
by delivery of the certificate indorsed by the transferor-owner. For a transfer to be
valid, it should be entered into the books of the corporation. GR is that bylaws of a
corporation are valid if they are reasonable and calculate to carry into effect the
objectives of the corporation, and always within the limits of the charter. They must
be subordinate to the Constitution and the laws of the land, must not infringe public
policy or be hostile to public welfare, must not disturb vested rights or impair
obligations of contracts. It cannot take away or abridge the substantial rights of a
stockholder. Under the statute authorizing by-laws for the transfer of stock, a
corporation can do no more than prescribe a general mode of transfer on the
corporate books and cannot justify an unreasonable restriction upon the right of
sale. The right of unrestrained transfer of shares inheres in the very nature of a
corporation. The right to impose restrictions on transfer of shares must be
conferred upon the corporation be the governing statute or by the articles of
incorporation. It cannot be done by a by-law without statutory or charter authority.

The by-law in question cannot also have any effect on Fleischer, since he had no
knowledge of the by-law when the shares were transferred to him and obtained the
same in GF and for value. When no restriction is placed by law on the transfer of
corporate stock, a purchaser is not affected by any contractual restriction of which
he had no notice or wasnt aware. A by-law of a corporation which provides that
transfer of stock shall not be valid unless approved by the board for instance, or
any other restriction imposed, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless stockholders, cannot be
made available to defeat the rights of third persons. Mandamus will lie in favor of
Fleischer to compel the Treasurer of Botica to register his shares.
Govt of Phils. V El Hogar. (for the facts, goto corporate powers section) I: W/n
the by-laws of el Hogar, which empowers the board to cancel shares and return to
the owner the balance resulting from the liquidation, by a vote of absolute majority
of the members.
H: The by-law provision is an absolute nullity, since it is in direct conflict with the
Code which declares that the board shall not have the power to force the surrender
and withdrawal of unmatured stock except in case of liquidation of the corporation
or forfeiture of stock. While it is a nullity, it is insufficient to necessitate the
involuntary dissolution of the corporation through a quo warranto proceeding. It
cannot be enforced even if the directors were to attempt to do so.
I: W/n a by-law provision which allows directors to fill vacancies in the directorate
by choosing suitable persons from among the SHs to avert a failure of a quorum in
SH meetings is valid
H: The practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of
individuals chosen by the directors to fill the vacancies in the body.
I: W/n a by-law provision which authorizes the distribution to the directors of el
Hogar 5% net profit in proportion to their attendance at board meetings is valid

25

H: The Corporation Law does not undertake to prescribe the rate of compensation
for the directors of the corporation. The power to fix compensation is left to the
corporation itself, to be determined in its by-laws. Pursuant to this statutory
authority, el Hogar has fixed the compensation for its directors in its by-laws. If a
mistake has been made, or the rule adopted in the byaws has been found to work
harmful results, the remedy is in the hands of the SHs who have the power at any
lawful meeting to change the rule.

formally organize includes not only adoption of by-laws but also the
establishment of the Board of Directors which will administer the
affairs of the corporation and exercise its powers
the AOI names the initial members of the Board who are to act until
the 1st set of directors are duly elected and qualified
o this interim board can perform the functions of a regular board
until the date of the election of directors
o once elected, the directors must complete the organization of the
corporation by electing the officers

I: W/n 2 by-law provisions which require (1) persons elected to the board be
holders of shares with a paid-up value of P5K and (2) that directors who loan from
the association waive their right as SHs are valid
H: the Code specifically gives power to the corporation to provide in its by-laws for
the qualifications of directors, and the requirement of security from them for the
proper discharge of the duties of their office, is highly prudent and in conformity
with good practice. The code also has safeguards on directors from making loans
to themselves, designed to prevent the possibility of looting of the corporation. The
by-law provision is consistent with the code on this one. Valid.
2.

Section 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president, who
shall be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. Any two (2) or more positions may be held concurrently
by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.

Election of directors and officers; commencement of business

The directors or trustees and officers to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the number
of directors or trustees as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.

Section 22. Effects on non-use of corporate charter and continuous inoperation of a

corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

This provision shall not apply if the failure to organize, commence the transaction of
its businesses or the construction of its works, or to continuously operate is due to
causes beyond the control of the corporation as may be determined by the
Securities and Exchange Commission.

after approval of by-laws, and the directors and offices elected, the
corporation is ready to commence business
it must do so within 2 years from date of incorporation;
o otherwise, its corporate powers will cease and will be deemed
dissolved

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3.

Annual financial statements

Once organized, a corporation is required to keep proper accounting
records and to file financial statements with the SEC annually

27